Proposed Amendments to the Rules under the Hart Scott Rodino Act will require compliance with the Act’s reporting and waiting period requirements for certain acquisitions of exclusive pharmaceutical patent licenses that historically have not been reportable because the licensor retained manufacturing rights under the patent.  

On August 13, 2012, the Federal Trade Commission (FTC), in consultation with the U.S. Department of Justice, proposed Amendments* to the premerger notification Rules regarding when a transfer of rights to a pharmaceutical patent is reportable under the HSR Act. The Amendments would extend HSR Rules 801.1 and 801.2 to formalize and broaden unofficial guidance given by FTC staff regarding when transactions involving the transfer of exclusive rights to a pharmaceutical patent — generally by license — are potentially reportable under the HSR Act. Notably, the proposed Amendments would result in a significant change in the weight given by FTC staff to retained manufacturing rights by deeming a license to be exclusive even when the licensor retains the right to manufacture pharmaceuticals for the licensee. The Commission is seeking comments on the proposed Amendments until October 25, 2012.  

The HSR Act covers acquisitions, so existing patent licenses are unlikely to be affected by the proposed Amendments. While the Amendments are now only proposals, companies considering granting exclusive rights to a pharmaceutical patent should at this time analyze the HSR Act reportability of the transfer under the proposed Amendments and, if necessary, provide for additional time to comply with the HSR Act’s notification and waiting period requirements. The initial waiting period under the HSR Act is 30 calendar days (or 15 calendar days in certain limited situations).  

Pharmaceutical Patent Rights Transfers Under the HSR Act

Under the HSR Act, parties involved in acquisitions of voting securities and assets that meet certain party and transaction size thresholds must file a notification with the federal antitrust agencies and observe a waiting period prior to closing their transaction so that the agencies have time to review the transaction before assets become commingled.

At the present time, entering into a patent license is not reportable as an asset acquisition unless it includes the exclusive rights to “make, use and sell” under the patent. However, when the licensor retains some rights in the patent, either outright or over time, legal analysis and consultation with FTC staff are often necessary to determine whether the exclusivity of the license has been compromised for HSR Act reportability purposes. In the pharmaceutical industry it is not uncommon for licensors to retain the right to manufacture, granting only the rights to “use and sell” under the patent, and over time the FTC staff has viewed the grant of such a license to be a non-reportable event similar to entering into a simple distribution agreement.  

Formalizing and Expanding the Types of Patent Transfers Subject to HSR Act Notification

In the Amendments, the Commission would change this approach based on its current belief that the pharmaceutical industry “presents unique incentives for the use of exclusive licenses.” According to the Commission, in the pharmaceutical industry an innovator may discover a compound, but not have the resources to support their approval and marketing, so it must license the rights to others (often to a much larger company). Accordingly, the Commission is limiting the proposed Amendments to pharmaceutical patent rights. Notably, the proposed Rules do not refer to “licenses,” as the FTC does not want the form of the transaction to dictate the types of rights transfers that are subject to notification under the HSR Act.

According to the Commission, the proposed Amendments are expected to require HSR notification of approximately 30 additional transactions each year, mostly due to amending the longstanding FTC staff approach that treated retained manufacturing rights as a sufficient limitation on exclusivity to warrant exemption from the HSR Act’s reporting requirements.